Spinal cord contusion injury leads to severe tissue loss and subsequent deficit of motor, sensory and vegetative functions below the lesion site. In this study we investigated whether transplantation of neuroectodermal stem cells into the injured rat spinal cord is able to induce significant morphological and functional improvement in a chronic spinal cord injury model. Mouse embryonic clonal neuroectodermal stem cells (NE-TR-4C) were grafted intraspinally five weeks after a spinal cord contusion injury performed in SD rats. Control animals underwent contusion injury without stem cell transplantation. Functional tests and detailed morphological analysis were performed to evaluate the effects of grafted cells in different time points. Grafted animals showed significantly better functional recovery compared with control animals. Morphologically, the contusion cavity was significantly smaller, and the amount of spared tissue was significantly higher in grafted animals. Retrograde tracing studies showed a statistically significant increase in the number of FB-labelled neurons rostral to the injury. The extent of functional improvement was related to the amount of inhibitory factors (GFAP, CS-56) around the cavity and microglial reactions in the injured segment. Five days after transplantation the majority of grafted cells appeared to survive, formed clusters and a small proportion of the cells differentiated into neurons and astrocytes. Ten days after grafting the majority of the grafted cells appeared as nonviable fragments in microglia/macrophage cells. These data suggest that grafted neuroectodermal stem cells are able to induce morphological and functional recovery after chronic spinal cord contusion injury despite the limited survival of transplanted cells.